Virginia Short Sales are FAKE. Only 5% Close.

By
Real Estate Broker/Owner with Northern Virginia Homes - FRANKLY REAL ESTATE Inc

 Update: This posting is oldy but a goodie(2/2008), More short sales are closing now, but this article still explains the process. Newer Short Sale postings here.

Most Short Sales are what I call "FAKE listings." Only 1 in 20 sells. In Arlington only 3 have sold out of 65 attempts.

I briefly went over Short Sales when I defined all SOL Homes including REOs, Bank Owned Etc. But Short Sales need more attention, as they are very tricky and misleading.

A Short Sale is a listing for sale that requires "Third Party Approval." That means that 1, or 2!!, banks are owed MORE than the list price. For example:

  1. Home is bought for $500,000 with 5%, or $25k down.
  2. Home has a $475,000 mortgage.
  3. Value dropped below $475,000
  4. If the seller is facing foreclosure, they slash their price for a quick sale
  5. A Short Sale is attempted at $450,000
  6. If the bank accepts it, the BANK eats $25,000 (see Phantom tax for Seller Update 2/2010: laws changed regarding this tax)

The Theory Behind Short Sales: Banks would be better off to accept a loss now, versus going through the legal expense of a foreclosure, just to end up selling it for less later. Win win, right? Wrong. Read on. Bank Trick 1: "Sure, we will consider a Short Sale, IF YOU KEEP PAYING US." Yep, a bank sees a desperate seller, and a potential $50,000 loss. They then mislead them into thinking that they might consider taking a bath on the deal IF the owner keeps paying their mortgage. The bank then ignores offers for 2-4 months in order to squeeze out another $2,000 x 4 or $8,000 profit. Brilliant. The bank then takes it over after foreclosure and sells it for $10,000 OVER the Short Sale List price. $18,000 better off, NOT doing a Short Sale. (Let's not forget the banks are losing their shirts too.) Bank Trick 2: Sometimes the bank has mortgage insurance and it is CHEAPER for them to let it foreclose versus allowing a Short Sale, which is NOT insured. For example, I was at an NVAR short sale class and a Realtor asked the speaker, "Why after 60 days, calling 2 times a day (120 calls) with a full price Short Sale offer, did the bank not call us back?" The speaker claimed it was due to an overworked staff.

I asked:

  1. Did they tell you they would consider a Short Sale IF you kept paying $3,000 a month? The answer was Yes.
  2. Was the home bought with Mortgage insurance? The answer was Yes.
  3. Bingo! Why eat $50,000, by accepting the low offer, if the bank a) gets $3,000 a month and b) is insured against a foreclosure and NOT a Short Sale.

She was pissed. She realized that she had been "had." But this goes on ALL THE TIME. It can take MONTHS to hear back.

Another example:

  1. A seller in Clarendon 1021 tries to sell his property and profit $30,000 at $600k. (Yeah right!)
  2. Then he drops it to $570,000. No bites, but the foreclosure is pending!
  3. They SLASH it to $530,000 (sidenote, I get flooded with calls from friend that want to pick it up for a steal at $470,000! I said that it was impossible... since I'd buy if that price was a possibility.)
  4. It sits for another month, then the listing disappears after 100 days!
  5. A month later it is "bank owned" and listed for $560,000
  6. It sells for $540,000 in 26 days.

The moral here is banks are not dumb and the market isn't so horrible that they will take all these lowball offers. They sold it for $10,000 OVER the previous list price (which probably had lower offers).

Short Sale Statistics:

Reston homes from $300k to $400k.
- 20 Active "Short Sales" in Reston (watch out for "Not a Short Sale" listings)
- 73 were Withdrawn, or Expired.
- 3 Under Contract (1 under contract since Nov 2007! Many UC do not close.)

Only 3 sold in the last 24 months. 3 closed sales in 100 attempts!

  1. Dropped From $480k to $400k, sold at $400k (Full list)
  2. Dropped from $430k to $400k sold for $380k (5% under list)
  3. Dropped from $380k to $350k sold for $345k (2% under list)

Arlington Short sales.
- 25 Actives
- 37 Withdrawn
Only 3 have sold in ALL price ranges in all of Arlington in the last 2 years.

  1. Listed at $335k, sold for $335
  2. Listed at 700k dropped to $620, sold for $600k
  3. Listed at 480k dropped to $420k sold for $420.

In Alexandria, only 8 have closed in 2 years out of 80 attempts. (most were at list, or 2% under list, some were $20k over list) I show this, so you don't think "Wow, they are desperate, we can now lowball. These 3 were the ONLY successful ones. Probably because they gave the bank a real offer.

Ok, so enough already with the War N Peace, what should I do?

Advice for Regular Sellers

  1. Do NOT blindly compete with a Short Sale. If you get an inexperienced agent, and they see 3 Short Sales in your neighborhood, and they have you compete against these "fake" listings, you can lose $25,000. Hope you "saved a ton" on that agent. (see Realtor Rebates)

Advice for Sellers Facing Foreclosure

  1. Watch out for the bank tricks to "keep paying." Talk to a lawyer that specializes in bankruptcy to help guide you. They MIGHT recommend stopping payments immediately and saving it up for a rental.
  2. Use an agent that has completed (as in CLOSED, not listed) at least 1 Short Sale.
  3. If you have mortgage insurance, be extra careful, the bank might prefer that you foreclose.
  4. Get bank approval for your list price before listing it. Put in the listing remarks "List Price approved." Otherwise you will get lumped into all the other Fake Listings and ignored by smart buyer agents.

Advice for Buyers looking for a "steal" (see "deals" post)

  1. Avoid Short Sales, or expect to wait 2-3 months and expect to put in 5-10 offers on Short Sales before one is accepted. A Short Sale in my building now has 4 offers. He says he is expecting a reply any day now... sorry, but yeah right!
  2. Look for Approved Short Sales. Ask if the bank has been contacted and if a price has been approved. Multiply time estimates by 4. Ie. 3 days= 12 days.
  3. Consider offering near, full or OVER list. What! Over list! Are you nuts! CNN says this is a BUYER's Market! I know it sounds crazy, but if you and your agent see the price is well under your other options... I've said time and time again, I'd rather you pay $10,000 OVER list on a house that is $50,000 under the competition versus "saving" $50,000 on a home that is overpriced by $100,000. Ignore list price, focus on VALUE.
  4. Focus on Bank Owned. These units get replies in a day or two. (See video of Realtor buying a Bank Owned property)

Advice for Buyer agents & Listing agents

  1. If you get one to close, change the remarks to SHORT SALE, NOT TO BE USED AS A COMP in hopes that the appraiser will take that into consideration and not trash the neighborhood (buyer agents, demand it of the listing agent to try to help your client's "deal" not turn into destroying his own investment).

Side note: A home should NOT go under contract until the BANK signs it, but many agents will make this mistake. The seller signing it means nothing, and it should stay on the market as Active.

  • Updated Correction 2-29-08 I'd like to thank DAAR CEO Jeanette Newton for this correction. I'm excited that she is participating in blogging!
  • My above sidenote about when to go Under Contract is 100% wrong. So let me explain... IF a seller signs the offer, as written, it is to be listed by default on the MLS as Under Contract with No Kick Out. The problem for the seller is that most MLS websites will remove the listing, so the chance of a better offer (and a higher chance for the bank to accept) is slim to none.

    Here are a sellers' options (please comment if you know of more options) :

  • 1) A seller can counter the contract and add in a "Kick Out" so further offers can be reviewed. The listing then can be set to Under Contract with Kick Out (this was suggested by Loudoun Realtor Tony Arko). But only a buyer agent looking on the back end MLS can find UC/KO. (A Kick Out means "there is still a major contingency here, feel free to submit another offer, it still can be considered and the first contract might be kicked out.")
  • 2) Another way to keep it active (like the unit in my building with 4 offers) is for the seller to send the "offers" unsigned to the bank. Why not try and keep your home as "Active" for as long as possible? Some banks will require the seller to sign, so try #3.
  • 3) Or lastly, the seller might add "acceptance of the contract is contingent on lender approval." or "contingent upon review and approval of the lender." That one line can keep it "Active." I am not a lawyer, so please verify any additions you make to a contract with a lawyer.

    As a buyer agent I would prefer it to be "Under Contract" if I was the listing agent, I would want it to be Active. So it depends whose side I am on, it is part of the negotiations. You can even counter with "Increase your price $2,000 and we will place it UC/KO."

  • Conclusion: Short sales suck.

    -Written by Frank Borges LL0SA- Broker FranklyRealty.com
    (please report typos)

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    Rainmaker
    88,900
    Paul Moye
    Benchmark Realty - Franklin, TN
    Broker, GRI, SRES

    Godd info, you are right there are few that will ever make it to closing but the more presuure and statistics that come out the more pressure the investor markets will put on improving these nmbers.

    But 1 small FYI, Short Sales in excess of 10% of value are more costly to a lender than foreclosure. It also effects their write off. Short Sale is a LOss, a foreclosure is a devaluation of earnings that is written off as a pre-tax loss and does not effect Earnings Per Share...

    Mar 03, 2008 08:09 PM #25
    Rainmaker
    136,271
    FRANK LL0SA Esq.- Northern Virginia Broker .:. FranklyRealty.com
    Northern Virginia Homes - FRANKLY REAL ESTATE Inc - Arlington, VA

    Hey Paul,

    Can you explain what you mean by excess of 10% of value?

    Maybe with some examples? And also reexplain how Short Sales vs foreclosures are written off, and in your opinion how much better does a short sale have to be over a foreclosure for the bank to take that route?

    Also when it forecloses, it usually becomes a REO, so are you accounting for that in your tax comment?

    Love to see it in my comments, or you can blog about it and add a link in the comments.

    I think this stuff is fascinating. Only when you truly understand the other side, can you help negotiate to a settlement.

    Mar 03, 2008 08:34 PM #26
    Rainmaker
    49,491
    BJ Matson
    Remax Town Center - Olney, MD

    Frank, this is great insight, thank you for sharing.  I don't know if "fake" is appropriate, but it's still good to know how many Banks are handling the short sales. I'm closing on 2 this month and didn't run into the problems you mentioned. We didn't low-ball either.. we went in at asking price on the short sale.  We didn't play any games and we got to settlement in about 60 days.  thanks again

    May 15, 2008 08:16 AM #27
    Rainmaker
    134,415
    Paul Francis
    Prudential Americana Group - REALTORS - Las Vegas, NV
    Las Vegas Real Estate - Summerlin Homes - 702.592.

    Frankly,

    Informative and entertaining post.. our numbers are certainly different concerning short sales as banks have become more responsive to the Las Vegas market for those of us with the systems in place. I love the "Frank" advice you gave concerning dealing with the banks.

    Currently, we have now entered the game of playing with the banks auction games in bidding up prices from overzealous buyers on bank owned properties.

    My key advice when it comes to dealing with the games is focus on market values and not list prices.

     

    Jun 21, 2008 04:05 AM #28
    Rainer
    8,649
    Tanya Johnson
    Tanya & Co./Keller Williams - Ashburn, VA

    This was a great post. Short sales are just hurting all of us. The listing agent has to reduce the price even lower to get agents to write an offer. Most agents are staying clear of short sales. Having said that, we did just close our first short sale listing this week. The only reason the other agents wrote on it was because they knew us and knew we would have a short sale negotiator involved.

    Thanks again for the post.

    Tanya Johnson

    Jun 21, 2008 12:35 PM #29
    Ambassador
    1,650,708
    Fernando Herboso - Broker for Maxus Realty Group
    Maxus Realty Group - Broker 301-246-0001 - Gaithersburg, MD
    301-246-0001 Serving Maryland, DC and Northern VA

    I agree with you. .but sometimes, a short sale is the is the only option some people have to avoid foreclosure. . .and when it your neck on the line. . . you just simply hope

    Jun 28, 2008 11:30 AM #30
    Rainmaker
    331,162
    Andrew Monaghan
    Your Phoenix Home Source - Glendale, AZ
    CRS, GRI, EPro Associate Broker

    That number seems high for the short sales in AZ but im seeing more close as banks are wising up a bit

    Jun 28, 2008 01:43 PM #31
    Rainmaker
    136,271
    FRANK LL0SA Esq.- Northern Virginia Broker .:. FranklyRealty.com
    Northern Virginia Homes - FRANKLY REAL ESTATE Inc - Arlington, VA

    Fernando,

    I never said that a seller shouldn't try a short sale. Sure, why not, can;t hurt them. But if they do that route, don't pick a clueless agent, or they will have no chance of closing.

    Jun 29, 2008 11:09 AM #32
    Rainer
    12,140
    Dawn Uselding
    A New Dawn Real Estate Services, LLC - Manitowoc, WI
    Short Sale Assistant

    Frank,

    I am the short sale negotiator that works with Matt Yogerst that closes 42% of his short sales.  Your post was very informative and entertaining but I have to disagree with a few points.

    You can get short sale status prior to getting an offer.  When you list a property get all the necessary documentation and submit the listing contract and the authorization along with a request for short sale status.  If you really want to move it along have an investor put in a low cash offer so that the entire short sale package can be submitted and the appraisal ordered.  The appraisal is the crucial piece for a short sale.  The lender negotiates off of the appraisal not the amount owed.  Each type of loan has guidelines that the loss mitigation negotiators use.  Fanny Mae typically will accept 92% net of the appraisal , Freddie Mac also is a 92% net.  FHA is 82% of the appraisal net, VA is 88% net and conventional ranges from 70% on the low end to 82% on the high.

    Other bloggers have corrected you an your perception of the signed offer from the sellers lender.

    I also disagree with you on the amount of time it takes to do a short sale.  The last one Matt and I closed took 30 days from writing the offer to closing.  One of the most common causes of slow short sales is an incomplete short sale package.  Every lender and servicer requires a slightly different short sale package.  When you request short sale status I also suggest you request a list of what documentation that lender requires for a short sale. When a short sale is submitted it doesn't go directly to the loss mitigation negotiator, it is first processed to determine if the package is complete.  If it isn't they don't call you, you either find out through multiple calls to the lender or they simply 86 the package and you can start over.  That is why I suggest using a short sale negotiator.  Between their expertise on what each lender needs and their contacts with loss mitigation negotiators they can be an invaluable asset to Realtors.  Just make sure that they are competent.  Ask for references, other people they have worked with. 

    I do agree with you wholeheartedly that the seller shouldn't pick a clueless agent or they won't have a chance of closing.  I also agree that you should pull title or get a letter report so you aren't blind sided by liens against the property.  That is another area a short sale negotiator is an asset, they negotiate settlements where possible on liens and judgments. 

    Jul 08, 2008 02:19 AM #33
    Rainer
    7,927
    Ben Heisler
    Keller Williams Realty - Ashburn, VA

    I have had great success with short sales on the listing side. I have a third party negotiator involved who does all the corresponding with the bank but he has had huge success with the banks. As a buyers agent it is very discouraging to write on a short sale with a buyer as many listing agents are not skilled or experienced and are doing a disservice to their sellers by even taking the listing!

    Jan 18, 2009 11:35 AM #34
    Anonymous
    Anonymous
    Steve Bradley

    Nice post but the reason for the failed short sales in my experience and humble opinion is almost always the listing agent.  We are out in Northern Virginia as well and short sales started up for us mid to late 2007.  Of course they were here earlier but that's the time we became more aware of them within the MLS.

    Our current close rate is very high and to date anything we've signed as a listing has been approved by all banks.  Add to that the fact that we've not had to give back on commissions and we are more than happy to take these on.  Also I'd note that only twice has the deal closed with a different buyer than originally wrote the contract.  So they are possible and the fact is they are a huge part of the service we need to provide to our neighbors and clients.

    Currently we do our own negotiating and are typically managing anywhere from 5-10 sales a month now.  A year ago maybe one or two a month.  We don't feel the third party people have the same concerns about it closing or about our compensation.  Some flat out tell you if the bank challenges the commissions it will be reduced.  Yeah, I don't think I'm okay with that.  I speak with loss mitigators all the time and they all echo one very disturbing fact - 'Realtors are the easiest game in town to get money from in the process'.  They go on about how Realtors themselves must not believe in their own value as all they have to do is mention it might be denied based on the bottom line and more often than not the Realtor suggests reducing commissions to get it closed!  How crazy is that? 

    A year ago it was harder but now it's just knowing the process.  The statement about them being 'False' listings doesn't hold true in my market and I am basically in the same market as you (Frank).  Of course I service Prince William and Loudoun Counties mostly but as far as I'm concerned I'll take these everyday of the week.  As professionals if we stay on task and get educated we can help this situation.  Sadly too many Realtors tend to avoid anything past what their state requirments are for continuing education and those agents should stay out of the short sale process all together.

    Apr 05, 2009 06:44 PM #35
    Rainmaker
    136,271
    FRANK LL0SA Esq.- Northern Virginia Broker .:. FranklyRealty.com
    Northern Virginia Homes - FRANKLY REAL ESTATE Inc - Arlington, VA

    Steve, this post is over a year old. Here is the update:

    http://blog.franklyrealty.com/search/label/Short%20Sales

    Frank

     

    Apr 06, 2009 03:19 AM #36
    Rainmaker
    102,779
    Mike Linkenauger
    First Coast Realty Associates - Jacksonville, FL
    Short Sale Realtor - Jacksonville FL

    You're not a very smart person, and should really check things around prior to posting.  You are comparing ACTIVE and WITHDRAWN listings to SOLD listings.  Did it EVER occur to you that maybe these "active" OR "withdrawn" status listings EVENTUALLY will close??  In 2008 short sale inventories were on the rise, THAT is the reason such a small percentage of short sales had closed when you wrote this. To include active and withdrawn listings in these statistics is a competency issue.

    Are you saying that 95% of all short sale listings get foreclosed on???  You are when you say "only 5% of short sale listings close".  The only thing "FAKE" here are your statistics, and misleading the public when short sales already have a bad wrap is a no-no.  Ethics violation??? 

    Anyway, reality is, short sales are likely overtake REO's this week with HAFA streamlining, and agents like you are being left in the dust while truly "innovative" agents are working on seven figure incomes this year.  Good luck!

    Mar 07, 2010 09:21 PM #37
    Rainmaker
    136,271
    FRANK LL0SA Esq.- Northern Virginia Broker .:. FranklyRealty.com
    Northern Virginia Homes - FRANKLY REAL ESTATE Inc - Arlington, VA

    Who is this douchbag Mike commenting on a 2 year old post?

    Frank

    Mar 08, 2010 12:32 AM #38
    Rainmaker
    207,484
    Dan Rochon
    Dan and Traci & Consultants - Keller Williams Realty - Alexandria, VA
    Short Sale Specialist - Team Serving Virginia, Maryland, and DC

    Hey Frank,

    You are an agent in Northern Virginia that I respect.  FYI:  Mike is an agent in Florida that does a TON of short sales and refers them across the country.  My sales team is working with him with numerous home owners to assist them to avoid foreclosure.

    I hate to jump into an argument, but thought that you would like to know that Mike is very well respected as you are.

    Best of luck on your continued success!

    Mar 08, 2010 09:33 AM #39
    Rainer
    27,578
    Billy Burke
    The Auctionarium, Inc - Rancho Mirage, CA
    CAI - AARE

    Folks:

    I think that any professional working in the marketplace realizes that this was close to being true when posted in 2008 and it shows how the short sale marketplace has matured in the past 25-months.

    The new TARP HAMP HAFA rules on processing short sales only applies to homes that were in the loan modification program where the borrower still cannot make the payments.

    People within the industry and at Treasury who manage the program are still sceptical that any lenders will be able to comply with the 10-day turn around timelines when they come into effect April 5th.

    The good news is there are now for the first time some sort of federal guidlines on how to process a short sale, what is required and how long it should take.

    In 2007 to 2008 90% of our short sale offers were rejected.

    100% of those homes were subsuquently foreclosed upon incurring additional costs of $50,000 to $70,000 per home and most sold for at least $100,000 less than we offered for a short sale. Several sold for $300,000 to $500,000 less than we offered.

    This post on Active Rain is not costing anyone lost short sale business, lets get real.

    What can you do about those "lost deals" when looking at them in your rearview mirror?

    Not much...

    If any of you agents have deals like that please write me a one or two page summary and e-mail it to me.

     

    Mar 08, 2010 10:33 AM #40
    Rainmaker
    162,126
    Lorinda Ward
    Keffer Realty - Norfolk, VA
    Serving, Hampton Roads Virginia. Norfolk, Chesapeake, Va Beach

    This is still a great post.  Very informative, it actually got me riled up.  Thank you for sharing.

    Mar 16, 2011 09:07 PM #44
    Rainer
    333,112
    Paul Gapski
    Berkshire Hathaway / Prudential Ca Realty - El Cajon, CA
    619-504-8999,#1 Resource SD Relo

    Well sometimes i dont know what to think of short sales. They are getting better and then they are not!

    Aug 07, 2011 01:58 AM #45
    Rainer
    333,112
    Paul Gapski
    Berkshire Hathaway / Prudential Ca Realty - El Cajon, CA
    619-504-8999,#1 Resource SD Relo

    Well sometimes i dont know what to think of short sales. They are getting better and then they are not!

    Aug 14, 2011 12:28 AM #46
    Anonymous
    Anonymous
    Martha L

    Thank you for telling the truth. As a buyer of a short sale that did not close I wasted time, money and have not yet gotten my security deposit back. I thought that I asked the right questions before heading down the short sale path but because it is so complex one really needs to fully understand all the caveats and not assume that the realtor or settlement agent has the necessary experience to make it happen.

     

    In my situation I was told the lender was Wells Fargo. Because the buyer has no access to the loan information of the seller there was no way I could verify this without the seller’s permission, so I had to trust my realtor to give me the correct information. There was also a jr lien holder that explicitly stated in the short sale agreement that they would not release the seller from their debt. Wells Fargo told the seller in their short sale agreement to work with the jr lien holder immediately after being approved to resolve transactions. The seller had a whole month to resolve the issues.

     

    I was led to believe we were ready to settle. A date was set, I met all my commitments including obtaining homeowners and flood insurance, obtained a cashier's check for my closing costs, got in my car and headed to the settlement office. Two thirds of the way there I received a text that the settlement would not take place. The HUD1 was not accepted because jr lien holder refused to release the seller of her debt. It turns out the mortgage was owned by Fannie Mae and Wells Fargo was the loan servicer. Fannie Mae has their own set of rules for short sales. If the jr lien holder accepts the $6000 dollars payment they must release the seller from their debt.

     

    Neither party would budge. There were 6 days left before my loan lock-in expired and interest rates were headed up. The seller and settlement agent wait until my lock expires, they wait until the short sale agreement with the jr lien holder expires and then tell me that the buyer is now going to borrow money from her son to pay the jr lien holder.

     

    I asked for my security deposit plus expenses back as the seller failed to follow the time is of the essence clause by not negotiating with the jr lien holder sooner. Also I was misinformed about the owner of the loan and the short sale agreement as written never would have closed under the Fannie Mae guidelines.

     

    The worst part is that the realtor then asked me to sign a release saying that “buyer financing” was the reason for the short sale failure. I have refused to sign this and have asked again for my security deposit plus expenses or we can go to mediation. I am still waiting for an answer.

     

    My take is short sales are a bad deal for the buyer and don't hold the seller to any obligation to perform according to the terms of the short sale agreement. Also don’t expect any help from the lenders, servicers or realtors when things go bad.

     

    Lesson learned - I will never again agree to a short sale.

     

    Jul 23, 2013 09:04 PM #47
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    Rainmaker
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    FRANK LL0SA Esq.- Northern Virginia Broker .:. FranklyRealty.com

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